Pretty much all the attention overnight has been on the outcome of the European Central Bank meeting, not so much whether the ECB would change any of its key policy rates, but what they would announce as far as bond purchases. The market was broadly expecting that the ECB was more than likely to continue with its program of purchasing €80bn/month beyond March 2017, perhaps with the opening that they could say “buy up to €80bn”.

The ECB announced that the bank would be reducing the amount of bond purchases from €80bn to €60bn after March through to December (and beyond if necessary). They also announced that they extend the range of the tenor of bonds purchased down to one year and that, if necessary, also buy bonds at yields of less than the ECB’s deposit facility rate that was of course left unchanged at -0.4%. The reduction in the tenor is a move that will help to increase the rundown in the ECB’s portfolio of (over €2tr), when they get to that point. Also, tilting purchases toward the shorter maturities would also steepen up the European rate curve, a point not lost on the European stock market with European bank stocks higher by 2.32% and the Eurostoxx 600 index 1.23% higher.

Given the above announcement to reduce bond purchases from March, one could have easily expected that the Euro would have been stronger this morning and European bond yields higher, though more at the longer end of the curve. This is not the case. This scribe had to look twice to see that the Euro was not in the 1.08-1.09 region, but instead trades this morning at just over 1.06. (The AUD/EUR is 0.7025.)

It was trading at around 1.08 before the announcement, it briefly spiked higher to around the 1.0825 region, before being sold aggressively. Reading between the lines, ECB President Draghi seems to have gotten his wish to reduce the amount of bond purchases – let’s for argument’s sake call that “tapering” for a moment – but also a weaker Euro. His language around the announcement and how he characterised the move was to send a message that there is still a very large amount of bond purchases. (The volume is back to March 15 to March 16 levels.) He was at pains to point out that this was “not tapering”, but re-calibrating the volume of ECB bond purchases. The ECB President said that there was a “very, very broad consensus”, that purchases would continue beyond 2017 if necessary to get inflation back to the ECB’s target of 2%. On the ECB’s forecasts, inflation gets back to 1.7% by 2019 from 1.3% next year.

The market seems to be taken something to heart from Draghi’s view that what was announced is not tapering, but a calibration. He said that tapering had not been discussed by the Board. Word games and semantics it seems. In his words, tapering is reducing to zero purchases. While noting that deflationary risks had abated, he said that there was still quite a lot of uncertainty and that the recovery likely remain fragile. Perhaps the Euro’s reaction was as much about Draghi’s characterisation of the economic outlook.

It’s going to be interesting to see how the market now trades the Euro, not only today, but into next week’s FOMC. The US rate market has continued to hold its pricing of a near certainty of a rate rise from the Fed next week and the focus will be on the dot plot Fed funds forecasts, the Fed’s outlook for the economy and Yellen’s presser. Has all the good news on the USD been priced in?

Meanwhile, the USD has been stronger overnight, making gains against most of the crosses overnight. The AUD is back down to 0.7460. The VIX is up smalls, US equities are also higher, while news on the commodity price front is mixed, base metals down, as is gold, iron ore and met coal too, while steaming coal rose $US1/t. There was mixed fundamental news for the AUD yesterday with a larger than expected AU trade deficit, but the Chinese trade report revealed stronger than expected exports and imports. There was very little data overnight. US Jobless claims for the week to Dec 3 remained low at 255k.

Coming up

It’s a pretty light calendar to close off the week with NZ credit card lending and AU housing finance approvals with interest particularly in the investment lending component, that’s perked up somewhat in recent months, as investment housing credit growth, despite more cautionary lending. China also has its CPI and PPI reports for November, with little change in CPI from 2.1% in October expected to tick up to 2.2%, but PPI rising at 2.3%, up more from 1.2% to October, rising import commodity prices a factor.

About the Author

Dave is a Director and Senior Economist with the NAB.

His bread and butter work is as a business, treasury or financial markets economist, speaking with clients ranging from the Bank’s agribusiness and corporate clients as well as to institutional clients at home and abroad.

He’s writes for the Bank’s daily and weekly economics and market reports, and speaks with the media, often on a day to day basis speaking about the economy and financial markets.

Dave did his economics apprenticeship with federal governments of various persuasions in Canberra, before he left Canberra in the late 1980s. He finished his indenture in Canberra as a senior economic adviser in the then Prime Minister Bob Hawke’s Department in Canberra, and before that in the Federal Treasury and the Bureau of Statistics.